Ad Exchanges Are (not) All The Same

Programmatic advertising exchanges facilitate trillions of transactions each year, totaling nearly a third of all display and video advertising. Globally, the industry is projected to grow to $37 billion by 2019, up from $14.2 billion in 2015.

For publishers and advertisers, determining the best way to deploy billions of marketing campaign dollars through programmatic advertising exchanges is of the upmost importance, with one path illuminated by a well-known economic theory.

In a market for lemons, formulated by George Akerlof in 1970 and demonstrated by the famous used car example, sellers offer goods that are either high quality or low quality, while buyers are unable to determine quality before purchase. To manage risk, buyers offer an average price, driving down the cost of quality inventory and inflating the cost of bad inventory.

This phenomenon describes the issue of adverse selection and is ultimately what happens when the amount of low-quality inventory in a marketplace reaches a tipping point, driving premium buyers away completely.

The advantages of quality control, and the issues that can arise in its absence, are fully explained and understood by Paul Milgrom, Ely Professor of Economics at Stanford University and Andrew Vogt, Research Assistant at Auctionomics, in the paper, “Ad Exchanges Are (not) All The Same: How Better Policed Exchanges Help Premium Publishers,” which covers the following topics:

The lemons theory and adverse selection in programmatic advertising exchanges

The financial advantages of quality assurance

The rising expectations of programmatic technology providers

OpenX leads the industry in overall traffic quality, according to Pixalate’s Global Seller Trust Index, beating competitors such as Google and Rubicon Project, and its exchange offers an empirical evaluation of the returns of strict quality standards.